Friday, December 14, 2007

Will China be the 21st Century's Dominant Economic Power?

This is a question that I ask at global seminars I present at. The most popular answer is usually China, followed by the U.S., and India too gets a few votes.

While anything can happen to tilt the position, I don't think there will be a single dominant economic superpower in the 21st century. The U.S. will continue to be the leading economic and military superpower in the world for the next 50 years at least. But in the following decades, I believe other economic powers will emerge, and Washington will have to share more power and responsibility with the likes of China and Russia. Increasing international cooperation between major powers will be necessary to effectively deal with global problems like terrorism, environmental pollution, infectious diseases and energy shortages.

This year in particular will probably be remembered as a turning point in the global economic balance of power. With the decline of the U.S. dollar and continuing housing/credit market woes, much of the rest of the world became uncoupled and effectively grew faster than the U.S in 2007. For the first time since the outbreak of World War one, nearly 100 years ago, all of the European stock markets combined surpassed the U.S. in total market capitalization.

Eastern and central Europe, led by Russia, is growing much faster than Western Europe. Run by Vladimir Putin and several dozen multi-billionaire oligarchs, the Russian economy is riding high on global energy and a commodities boom. Thanks to higher global commodity prices, Russia's GDP has already hit the $1 trillion mark. Two decades ago, the concept of Russia becoming a major plutocracy (or a government in which the wealthy class rules) was unimaginable, yet it has now become a reality.

In Asia, China has just surpassed Germany to become the third-largest economic power in the world right after the U.S. and Japan. In terms of stock market capitalization, China (the Mainland and Hong Kong combined) has already surpassed Japan to become number-two in the world.

China's GDP growth this year is more than 11%, reaching $3.27 trillion. At its current rate of growth, China will overtake Japan by 2011. Even if there is a recession in the U.S. in 2008, China's GDP growth in 2008 is likely to remain above 8%. Two commodity powerhouses, Brazil and Canada, also have $1 trillion economies for the first time ever. India's GDP too is looking to hit $1 trillion by 2010.

For much of the second half of the 20th century, the U.S. accounted for more than 40%—sometimes approaching 50%—of the world's total economic production. In other words, the U.S. economy was almost as big as the rest of the world combined. In the past five years, however, a 38% decline in the U.S. dollar and the superior growth of newly emerging economies is rapidly changing the global distribution of economic power, when measured in US Dollar terms.

China and its neighbors, like Russia, Taiwan, South Korea, Singapore and Malaysia, will probably evolve into a new Asian economic bloc. It is likely that this fast-growing region will become the new global epicenter of wealth creation in the 21st century. There will be many investment opportunities throughout the region that are shielded from the economic problems of the U.S.

The stocks in my Model China Strategy portfolio fall into this category. Many of them are already trading higher than they were before the November sell-off.

Benefiting form China

Establishing positions in successful, well-run Chinese companies trading in the U.S. could be the smartest move an investor could make in the coming decade. If investors get in now, not only will they benefit from the strength of the companies they own, but will also profit from increased demand, as millions of investors start scrambling for global investment opportunities in the coming months, and the inevitable recovery of the US Dollar. Yes I do believe that the US Dollar is undervalued. (I'll be explaining this in more detail at my presentation at the upcoming Sovereign Wealth Management 2008 conference in London in March 2008).

I'm not by any means predicting the collapse of the U.S. economy or US markets—there are many US companies that will provide solid, wealth-creating opportunities — but for the bulk of portfolios, I would suggest getting ahead of the crowd and start making money now.

The stocks in my Model China Strategy Portfolio currently lists 21 companies that can be purchased in the USA, in US Dollars. Of these 21 stocks, four of them have gained more than 200% so far. Another four stocks are up over 135%, and there are five other holdings that have posted profits of more than 50%. I believe there is still more upside to come.

When it comes to profiting from China's incredible growth, some of the best opportunities aren't even China-based! China's emergence has created a ripple effect throughout the world — if one knows where to look. My Model China Strategy Portfolio, has a diversified portfolio of holdings that contains more than just Chinese companies. Regions that could be invested in include Brazil, Taiwan and Singapore.

No matter where they're located, all of my selected companies have one thing in common — they're profiting big-time from China's scorching-hot economy. These China-based companies are up an average of more than 60% so far....... and they'll continue to gain in 2008 as the U.S. economy slows further. END